The Internal Revenue Service has established a policy of applying the constructive dividend doctrine when a shareholder waives his right to future undeclared dividends, where no bona fide business purpose exists for the waiver and where the benefited shareholder is a relative of the waiving shareholder. The Service has neither designated the business purposes which are to be regarded as legitimate nor announced what policy will prevail where both a bona fide business purpose and a substantial benefit to the waiving shareholder's relatives exist. However, case law in analogous tax areas indicates that the constructive dividend doctrine will not be applied where the business purpose is bona fide, even though the waiver also benefits relatives of the waiving shareholder.
Constructive Dividends: Taxing the Waiving Shareholder to the Extent of Dividends Waived,
1966 Duke Law Journal
Available at: http://scholarship.law.duke.edu/dlj/vol15/iss3/8